Quants: The Kings of Wall Street (part II)

In the middle of the 2000s, the Quants of Wall Street helped to regulate the chaos on the financial market. Thousands of companies, pension funds, banks entrusted their money to hedge funds, which were mainly engaged in algorithmic trading. In August 2007, there was a peak of activity of trading robots since the proportion of their orders reached to 70%.

During the crisis of 2007-2008, the high-frequency trading sharply reduced because of the financial problems of large institutional investors.

The crisis

The great hedge-fund bubble burst in August 2007. As a result, there happened the strongest, the strangest and the most prompt financial collapse in the whole history of the mankind, and the global economic crisis began. At the same time, no one of the Quants, in spite of their abilities and experience, noticed the signs of upcoming catastrophe. The reason for the stock exchange collapse has become the exclusion of probability of large fluctuations in the financial market. The model, which has been built on the hypothesis that the market is predictable and rational, is doomed to failure. When this model is controlled by millions of dollars, where the loan funds form the major part, the catastrophe is inevitable.

The USA mortgage crisis resulted in the reduction of the world’s stock indices by 20%. Two leading US investment banks went bankrupt and the three ceased their existence in the former quality. The panic seized the market. The high-frequency mechanism of Citadel failed and by the end of 2008, its leading hedge funds lost 50% of their assets. Griffin has become the most unlucky hedge fund manager.

By commenting on the situation of the market, James Simons said that many hedge funds did not know, whether they could survive or not. Moreover, in August 2007 his hedge fund Medallion lost 7%, but then restored the balance and by 2008 increased its assets by 80% using the extreme volatility of the market. By the results of 2008, James Simons became the most successful hedge fund manager earning $2.5 billion.

Isaac Newton, who lost 20,000 pounds sterling during the collapse of the “South Sea Company”, once said: “I can calculate the motion of heavenly bodies, but not the madness of people”.